How Ninety One has benefitted from current inflationary concerns

NZINGA QUNTA: Iain Cunningham, the co-head of Multi-Asset Growth at Ninety One, joins me now. Thanks so much for your time on the Market Update with Moneyweb, Iain. Inflation is rightly listed by many market participants as the key concern right now. However, you and your team flagged early on that it was likely to be more than transitory, and so you benefitted in the positioning of the Ninety One Global Strategic Managed Fund, which is a global multi-asset fund where you can adjust exposure to maximise downside protection and participate meaningfully in rising markets. Talk us through your thinking at the time.

IAIN CUNNINGHAM: Hi there. Yes, through the last couple of years one of the issues that we’ve had has been the notable excess stimulus that came as a function of governments and central banks trying to bridge the economic gap to support economies through the Covid shock.

As we emerged through 2021 obviously inflation was becoming more apparent and policymakers, in particular, [and] many market participants, were pointing towards supply constraints. Ultimately that was believed to be the main cause of inflation where, in fact, the money supply had been growing very materially in the US; it grew 20% per annum in a couple of years following the Covid shock. That’s a material influencer of demand. When you put more money into an economy, it makes the price of things go up, particularly if supply cannot respond.

And so we saw excess demand in the US and we are seeing increasingly tight labour markets and wages beginning to respond as well. When you get that kind of combination of factors, it usually means the prices are heading north. That was one of the things that certainly made us far more hawkish on inflation relative to what was taking place within the markets. We believed, given those dynamics, it was more than likely that central banks would have to respond to it and assets were not appropriately valued for that change in policy.

NZINGA QUNTA: So your positioning then versus now? Given the recent market corrections, how were you positioned and have you increased equity exposure?

IAIN CUNNINGHAM: Coming into this year we were very cautious on both fixed-income and equity. We had quite a high cash balance within Global Strategic Managed, our other strategies. That was ultimately to protect the portfolio to a decent degree from what we perceived to be both falling equity and fixed-income prices.

I think, as we look forward now, we would say fixed-income prices have done a significant amount of derating in terms of bond yields and have moved up quite notably – a number of hundred basic points across developed markets – and spreads have obviously widened as well. We would say that bond yields are beginning to get to the point where they’re starting to impact growth, so longer-dated bonds are starting to look somewhat more attractive. But we still expect short-dated bond yields to continue to move higher as central banks continue to fight inflation.

We would see equities, particularly within the US, as still out of line with where they should be. We’re looking at quite high forward valuations for the US equity market in particular. Ultimately our belief is that we will have to see ongoing derating there from a valuation perspective, and we’re concerned that the US will have to go into a recession to address these inflationary issues.

So we see downside to earnings as we head forward over the next six to 12 months. Therefore we remain pretty cautious on equities from here and we have actually reduced exposure further into this recent rally that we’ve seen in markets.

NZINGA QUNTA: You have quite a bit of a portfolio in cash. Have you started deploying some of this?

IAIN CUNNINGHAM: One area where we have started to deploy some of the cash is into some defensive government bonds, particularly in markets where we see quite notable inflation and growth headwinds in the future, So, within economies like Canada, New Zealand and Australia they have very large household-debt balances, as well as what we’d call housing bubbles. And the same in South Korea.

As interest rates have gone up we’ve started to see their housing markets in particular come under quite a bit of pressure. So we’re starting to say take some positions in those bond markets on the basis that we think they won’t be able to tolerate higher interest rates for longer, while the US probably will.

And [there’s] also the other area within risky assets. China embarked on its tightening at the beginning of 2021, over 18 months ago now, and we’re now seeing Chinese policymakers move quite aggressively in the other direction. They’re beginning to provide support to the economy and we believe that the Chinese economy will look healthier heading into 2023.

So we are using the significant weakness that we’ve seen in markets like the Chinese market, the Hong Kong market and some other parts of Asia to pick up exposure to some of our sort of favoured longer-term companies and businesses that operate.

NZINGA QUNTA: That’s interesting, given the rising concerns around China’s growth and the impact of lockdowns.

IAIN CUNNINGHAM: Yes. I think obviously the fact that there are lockdowns there is inhibiting some of the quite notable stimulus now [from] getting to work. Obviously, as we see lockdowns being relatively localised and probably beginning to recede as we move into to 2023, we think those issues are pretty well priced here.

The main concern has been the property market within China, but we are increasingly seeing state guarantees for certain debt issues. We’re seeing sort of bailout funds be raised at the local level to help certain property developers. So we’re seeing policymakers really step [in] to provide support, and ultimately the level of valuations here in many areas is just too attractive to pass up.

NZINGA QUNTA: And are there any other interesting positions you’re allocating to?

IAIN CUNNINGHAM: One other area we operate in is in the currency universe, which probably makes us quite different from many of our peers. We seek to extract value from global currency markets for our investors, and so this time last year we were actually building quite large long positions in the US dollar versus European and Asian currencies, because we expected the Fed to tighten policy really quickly.

We expected the People’s Bank of China to actually ease policy, and European central banks to be stuck somewhere in the middle. So we expect quite notable policy diversions between the Fed and other central banks around the world.

We closed most of those down through this summer, but we’ve begun to move long dollars again. We’ve been moving long dollars versus what we call dollar-block economies – that’s Canada, Australia and New Zealand – because again, as I mentioned with the bond markets, we see quite notable imbalances there with those housing markets coming under pressure. And we see it increasingly likely that those central banks in Canada, Australia and New Zealand will be forced to sort of ease policy before the Federal Reserve is [forced to].

As a function [of that] we expect increasing policy divergence on a six- to 12-month horizon, and therefore expect those currencies to weaken versus the dollar and actually [weaken] the implementation of those ideas. Those are actually quite diversifying for the portfolio as well, and protect against any prospective further weakness in equity markets.

NZINGA QUNTA: Iain Cunningham, the co-head of Multi-Asset Growth at Ninety One, joined us there. Thanks so much for your time on the Market Update with Moneyweb on SAfm.

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